Consultancies vulnerable as government plots non-compete axe

Government plans to abolish non-compete clauses could have a considerable impact on the professional services sector, according to recent reports. In the upcoming Budget, John Healey announced legislation aimed at reforming these clauses across the economy, with the goal of streamlining the labor market for startups and scaling firms.

The government will unveil the specifics of this legislation early next year. However, ministers have emphasized that the focus will be on "workers," suggesting that "equity partners" are unlikely to be part of this overhaul.

For the professional services sector, which heavily relies on senior individuals with robust client connections, these changes may be concerning. Pooja Dasgupta, a senior associate at Farrer & Co, explained that high-ranking senior associates and some salaried partners whose employment is typically governed by contracts could be affected. Abigail Fisher, the chief people officer at Grant Thornton UK, highlighted that the professional services sector's strength lies in its people, relationships, and expertise.

Non-competes, which are clauses in employment contracts that legally restrict individuals from working for a direct rival or starting a competing practice for a set period after leaving, have become increasingly prevalent in the consultancy industry. Big Four firms and other professional services firms have tightened these clauses in recent years, with some reaching up to two years in duration.

James Ransome, a partner at Patrick Morgan, suggested that if these restrictions are removed or reduced, there could be greater movement between firms, potentially benefiting challenger consultancies by allowing them to attract senior talent away from established firms.

However, the legal sector differs from the professional services industry, as Nick Woolf, a partner at Woolf&Co, pointed out. Most legal partners are members of a Limited Liability Partnership (LLP), and their restrictions are typically contained within partnership agreements, which would not be affected by the government's proposed changes.

In anticipation of these potential changes, City lawyers have already begun exploring alternatives. One option being considered is the increased use of gardening leave, a contract clause that requires employees to remain on the payroll during their notice period after resigning or being dismissed, but instructs them not to perform any duties.

Ransome noted that deferred cash compensation, unit allocations, profit-sharing arrangements, and other financial incentives could also be equally effective in retaining talent. He added that "for partners who are several years into their tenure, the prospect of walking away from significant unvested financial benefits can be a greater deterrent than the non-compete itself."